SAN DIEGO - Buy now and pay later. It's an irresistible offer, especially for cash-strapped Americans living paycheck to paycheck. But that offer is usually tied to high-interest credit cards or rental stores that gouge you with inflated prices. Now, there's another option. And it may be less risky than you think.
A booming tech startup in San Diego has built a retail marketplace online that lets people buy big ticket items on payment plans - without issuing a loan or a credit card. The startup, called Zebit, is catching fire online, earning $46 million in revenue last year, rocketing up from $21 million in 2017. That performance makes it one of the fastest-growing tech startups in San Diego, and CEO Marc Schneider said the company's trajectory points even further north. It's on track to rake in $100 million this year. For perspective: that's the annual revenue of San Diego's software star, Seismic, which just got a $1 billion valuation from venture capitalists in December.
Here's how it works
Zebit's online store is sort of like Amazon.com, but less massive. The company sells things like kitchen appliances, televisions, iPhones, tires and couches, among millions of other items. The company's customers don't have to pay full price for these items upfront. Instead, they fork over a small down payment and are set up on monthly payments that coincide with their paycheck cycle. Sounds kind of like payday loans meets Rent-a-Center, right? Not quite. There's more to it.
Zebit is not a cash lender (no money gets wired into your checking account). The company operates more like an old school creditor, issuing customers a line of store credit up to $2,500 with which they can buy products and pay for them later. The company doesn't check your credit, nor do they report to credit bureaus. And they don't charge interest. It's zero percent interest from start to finish; no fees or penalties either.
Schneider paints the company as rather altruistic, offering a fair way for "under-banked" consumers to buy the things they need - without falling prey to predatory schemes.
"Our target is the 80 percent of U.S. consumers who live paycheck to paycheck, who don't have affordable access to credit," Schneider said. "Those who are normally relegated to high cost predatory alternatives, taking out a payday loan at 400 percent APR or going to rent-to-own shops with limited selections."
But remember - they're raking in millions of revenue, so obviously there's profit motive.
Wait, how does Zebit make money?
Schneider said the company's only revenue driver is the marketplace. Like a normal retailer, Zebit needs to sell its products at a high enough price to guarantee them a decent profit margin. In other words, their profit needs to be baked into the sale price.
And as a customer, you'll see this on the company's website. They make it painstakingly clear how much you'll pay for each item in total - after all the payments are done. For some items, there's a noticeable hike in prices. For example, Zebit is selling one model of Apple's Macbook Air for $1,273.99, while the exact same model sells for $959 on Amazon. But for other items, the prices are comparable to major retailers. Zebit was selling a popular dining table and chairs for nearly the same price as the same model on Walmart.com.
Miro Copic, a business lecturer at San Diego State University, said Zebit's model doesn't seem unfair to the consumer. After all, they're essentially offering credit to a population considered a risk by most banks. They have to hedge their risk somehow.
"They've created an alternative for these under-banked individuals that's extraordinarily viable," Copic said. "The consumer gets to mitigate the risk of payday loans or high interest credit cards, which is a good thing. But I would urge people to remember that this is not an entirely altruistic deal. (Zebit is) approaching this positively, but at the end of the day it's still a business."
How Zebit avoids risk (and why you might get denied their credit)
Although they pride themselves on serving under-banked individuals (often those with credit scores of 550 or less), the company has still found a way to reduce their risk. The startup doesn't offer credit to just anyone.
Zebit is a tech company first and foremost, and they're using data science to suss out information about their potential customers before awarding them a credit line. Schneider was pretty tight-lipped about what data they collect - and how they use it - but he did say they get information from third-party sources of consumer data - for example, social media companies and other gold mines of consumer behavior.
They use this information to gauge how likely it is that a person will pay Zebit back. Then they set their customers up for success, aligning payments with paycheck dates and requiring everyone to be on automatic payment plans. They also don't let their customers overextend themselves. Say, for example, Zebit awards you a $1,000 line of credit, with which you buy a $1,000 television. After you've paid off $200 of that television, you don't get $200 in credit to go spend, as is the case with credit cards. Instead, Zebit makes you pay in full. Once the whole debt is paid off, they'll offer you another round of credit. Maybe $1,200 this time, if you were good.
"This is a new way to incentivize a customer to do the right thing," Schneider said.
In reality, what Zebit is doing is building their own credit score - a system that gauges the risk of a borrower. And the more users they gain on the platform, the better their machine learning will work to de-risk their customers.
It appears to be working for Zebit. Only about 1.5 percent of its customers default on their first payment, Schneider said, and the company's overall bad debt totals about 14 percent of what's been credited.
It should be noted, using Zebit will not rebuild your actual credit score, since the company does not report to credit bureaus. So while using the site might be helpful to buyers in a tight budget, it won't redeem a credit-wrecked consumer.
And if you default on Zebit and don't pay up, customers aren't home free. Schneider said the company devotes employees and resources to an internal collections team that is tasked with trying to recover money.
Big growth ahead
It appears that customers are a fan of the model. Since Zebit's marketplace officially came online in 2017, the company has accumulated over 350,000 customers. Of those customers, Schneider said 70 percent of them come back to buy a second purchase. The first purchase averages $400, the second purchase around $230.
"If we didn't acquire another customer past today, we would generate around $65 million in revenue this year, just from repeat orders alone," Schneider said.
But based on their rate of growth, the company is expecting to have more like 650,000 customers by year end.
Officially founded in 2015, Zebit was spun out of a company called Global Analytics. The company expects to be profitable by December 2019, and has leaned on startup capital until then. It's raised $39 million in venture capital in two rounds of funding, and is raising its Series C round right now. The company is hoping to gather $20 million for that round. But they also just closed $75 million in debt financing in October, which will help fund their operations.
"So we don't have to use equity dollars to fund orders," Schneider said. "Equity dollars can be used for people, process and technology."
Zebit employs 55 people in San Diego, and plans to employ nearly 70 by the year's end.
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